1. Services Trade for Growth: Challenges and Opportunities for Developing Countries Iza Lejarraga Trade Policy Linkages and Services Division Trade and Agriculture Directorate Harnessing Services for Sustainable Development: Opportunities and Challenges for Jordan Jordan Enterprise Development Corporation Amman, 21-22 September, 2010

2. OECD Trade & Agriculture 2Overview  Open Services Markets: What are the opportunities?  Liberalizing Services: What are the challenges?  Embedding Services Reform in a Growth Strategy  Measuring & Monitoring Services Reform: STRIs

3. OECD Trade & Agriculture 3 What are the opportunities? Opportunities oductivity gains Services seem to be more resilient to economic crisis than manufacturing Challenges High costs (financial, institutional, political, technical) of removing barriers embedded in domestic regulations Harder to measure, monitor, or reverse the effects of services liberalization Regulations fulfil a legitimate policy objective, that is, solving market failures (by definition welfare-enhancing). In the presence of other regulations, reducing one restriction while maintaining others yields ambiguous welfare effects (theory of second best) Hence the importance or prioritizing and sequencing services reforms! Liberalization leads to lower prices & greater variety for consumers Enterprises in all sectors (including manufacturing and agriculture) benefit from lower input costs (e.g., energy, transport, etc.) Generates higher demand and market access for domestic providers Gains from Trade Pro-poor: facilitates access to health, education, information Pro-employment: services are more intensive in human capital, and less prone to mechanization than agriculture and industry Pro-sustainable: services use fewer natural resources than industry and agriculture, putting less pressure on the environment Developme nt-friendly Countries with relatively fewer endowments of capital or poor geography stand more to gain from specialization in services Since price differentials are higher in services (esp., Mode 4) than in goods, the gains from services trade are much greater Services are more resilient to financial crises: gains are less vulnerable Higher Impact

4. OECD Trade & Agriculture 4 What are the challenges? Opportunities oductivity gais Services seem to be more resilient to economic crisis than manufacturing Challenges High costs (financial, institutional, political, technical) of removing barriers embedded in domestic regulations Harder to measure, monitor, or reverse the effects of services liberalization Regulations fulfil a legitimate policy objective, that is, solving market failures (by definition welfare-enhancing). In the presence of other regulations, reducing one restriction while maintaining others yields ambiguous welfare effects (theory of second best) Hence the importance or prioritizing and sequencing services reforms! Harder to identify measures embedded in domestic regulations High costs (financial, administrative, institutional) of removing barriers Complex political economy: greater number of stakeholders involved (regulators) than with tariffs, requiring greater coordination efforts Behind- the-border Regulations fulfil legitimate policy objectives: palliating market failures When they do, regulations are welfare-enhancing and removing them can be trade-restrictive (i.e., non-competitive markets). Reducing one restriction while maintaining others yields ambiguous welfare effects (theory of second best) Market Failures It is not feasible, let alone desirable, to open all sectors simultaneously Hence, it becomes important to have a strategy for prioritizing and sequencing reforms: linking services strategy to growth objectives. In order to set targets, monitor progress, and measure results it is useful to develop indicators on the degree of services restrictiveness Prioritiza- tion

5. OECD Trade & Agriculture 5 Embedding services reform in growth strategy  Services liberalization is a means to an end: linking it to growth  Economic growth is necessary for development  Services reforms worth pursuing should be linked to growth/societal objective  Getting the largest bang for the buck of regulatory reform  Targeting sectors that have highest impact: binding constraints  Assess where are the binding constraints to growth at any particular time  Liberalize selectively those sectors that relax the binding constraints to growth  If access to capital is not binding the economy, liberalizing financial services won’t yield a significant effect on growth until the binding constraint is relaxed  A framework for prioritization: Growth Diagnostics  Analytical tool to prioritize and rank interventions according to growth impact  Intuitive, accessible, practical: helps dialogue and coordination

6. OECD Trade & Agriculture 6 What reforms target constraints to entrepreneurship? High cost of financeLow return to economic activity Low social returnsLow appropriability government failures market failures poor geography low human capital bad infra- structure micro risks: property rights, corruption, taxes macro risks: financial, monetary, fiscal instability information externalities: “self-discovery” coordination externalities Low domestic savings + bad international finance bad local finance High riskHigh cost Low competition Problem: Low levels of private investment and entrepreneurship

7. OECD Trade & Agriculture 7 Measuring Services Reforms: STRIs  What is a Services Trade Restrictiveness Index (STRI)?  A composite indicator of services trade restrictiveness by sector and country  Not a measure of economic performance or commercial attractiveness  How is it developed?  Collects qualitative information on barriers to trade in services  Translates qualitative data into aggregated quantitative scores by sector  Classifies barriers by mode, MA/NT/DR, discriminatory, entry/ongoing operations  How can it be useful?  Helps assess the impact of services trade barriers in the economy  Enables comparison of restrictions across countries at the sectoral level  Facilitates bilateral and multilateral negotiations on trade in services  Catalyzes domestic political bargaining on services regulatory reforms

8. OECD Trade & Agriculture 8 OECD Method for Constructing STRIs How to select measures? Regulations covered by the GATS framework and those explicitly mentioned in RTAs Barriers identified as relevant by sector experts at OECD Services Expert Meetings Measures related to future WTO / GATS negotiations on rules Explore linkages between measures: complementarities and substitutability Dynamic nature of some sectors (e.g., telecommunications) may render some restrictions irrelevant while new ones emerge How to quantify measures? Scoring is done on a binary basis (87%; others continuous) Binding restrictions taken into account via automatic filling Weights for categories of measures based on expert judgement; measures within categories are equally weighted STRI is robust to all other weighting schemes; high rank correlation (close to 0.90) between weighting schemes STRI is negatively and significantly correlated with trade & investment flows (gravity equation)

9. OECD Trade & Agriculture 9 STRIs in MENA: Where does Jordan stand  STRIs: Selected MENA countries (2007)  Countries: Egypt, Jordan, Lebanon, Morocco  Sectors: financial (banking & insurance), telecoms, transport (air & maritime)  Data: questionnaires and country studies; de jure and de facto (implementation)  Method: aggregate (Anderson & Neary 1994) and modal (Dihel & Shepherd 2007)  Results: No country ranks most open/restrictive across all sectors  Jordan has relatively lower STRIs, except for insurance where it has many restrictions  Lebanon registers highest liberalization in banking (via mode 3; high protection mode 4)  Morocco has liberalized telecoms, banking, air transport (high barriers in maritime)  Egypt’s insurance and telecoms sectors are most liberalized; air most protected

10. OECD Trade & Agriculture 10 STRIs: Scores for Banking and Insurance Sectors AggregateMode 1Mode 2Mode 3Mode 4 Egypt 0.500.00 0.621.55 Jordan0.882.272.100.321.88 Morocco 1.613.443.170.910.40 AggregateMode 1Mode 2Mode 3Mode 4 Lebanon 0.200.00 0.042.69 Jordan 0.411.100.000.221.82 Egypt 0.851.490.001.031.07 Morocco 1.161.983.330.340.19 STRI Scores for Banking Sector STRI Scores for Insurance Sector

11. OECD Trade & Agriculture 11 STRIs: Scores for Telecommunications (Fixed and Mobile) AggregateMode 1Mode 2Mode 3Mode 4 Morocco 0.590.00 0.671.16 Jordan0.780.00 0.672.66 Egypt 0.990.00 0.772.24 AggregateMode 1Mode 2Mode 3Mode 4 Morocco 0.800.642.050.810.73 Jordan0.850.020.001.082.23 Egypt 1.220.642.051.361.81 STRI Scores for Fixed Telecoms Sector STRI Scores for Mobile Telecoms Sector

12. OECD Trade & Agriculture 12 STRIs: Scores for Transport Sectors (Maritime & Air) AggregateMode 1Mode 3Mode 4 Jordan0.470.460.490.36 Morocco 0.490.410.600.36 Egypt 0.730.410.600.10 AggregateMode 1Mode 3Mode 4 Jordan0.360.50.340.37 Egypt 0.550.750.520.17 Morocco 0.590.50.640.25 STRI Scores for Maritime Transport Sector STRI Scores for Air Transport Sector

13. OECD Trade & Agriculture 13 Thank you for your attention! OECD Trade and Agriculture Contact: iza.lejarraga@oecd.orgiza.lejarraga@oecd.org www.oecd.org